Multibagger Stocks – Polaris Financial Technology, Selan Explorations Technology Ltd.

BUY:  CMP @ 112

TARGET:  150

TIME FRAME: 12 MONTHS

TRADE: NSE/BSE

  • Polaris Financial Technology, formerly Polaris Software Lab, is a prominent player in BFSI space, being the outsourcing partner for 9 of top 10 global banks and 7 of top 10 global insurance companies.
  • Established in 1993, company is headquartered in Chennai and operates two business segments (i) Banking Financial Services and Insurance (BFSI) which accounts for close to 95% of consolidated revenues and (ii) Emerging verticals.
  • The company offers solutions in the retail and corporate banking, risk and treasury, capital markets, life and non-life insurance spaces. Serving over 250 customers across geographies, it has an employee count of 13,718 as of 30th June 2012
  • Its equity base of Rs. 49.73 crore comprises of 9.95 crore shares of face value Rs. 5 each, as of 30th June 2012. Of this, promoter holding stands at 29.15%, foreign institutional holding at 19.70% while domestic institutional is 11.45%, leaving 39.70% as float among resident Indian shareholders.
  • For FY12, on a consolidated basis, company posted very healthy set of financial performance with sales crossing the Rs. 2,000 crore-mark, at Rs. 2,052 crore, up 36% from FY11’s Rs. 1,511 crore. PAT for FY12 stood at Rs. Rs. 220, up 9% from FY11’s 203 crore, while EPS for Rs. 22.17.
  • During Q1FY13, company reported consolidated revenue of Rs. 569 crore, up 9% sequentially. In dollar terms, revenue rose 4% QoQ to US $ 107.6 million, from US $ 103.5 million. Besides addition of 14 new clients during the quarter, company had 75 billed days, highest in its last 5 quarters.
  • Capacity utilization of 80.5%, one of the highest among peers, lead to 8% QoQ higher EBITDA to Rs. 91 crore from Rs. 84 crore. In dollar terms, EBITDA was up 14% QoQ during the first quarter of the current fiscal. PAT for Q1 stood at Rs. 61 crore, leading to EPS of Rs. 6.13.
  • As of 30th June 2012, company had reserves of about Rs. 1,264 crore, translating to networth of Rs. 1,313 crore and BVPS of Rs. 132. It has cash and equivalents of Rs. 329 crore, translating to cash per share of Rs. 33.
  • The company is also having large chunk of realty/land at Chennai, which is likely to get monetized in the current financial year, which will improve its book value and profitability of FY 13 further.
  • The company’s exposure to Europe is relatively limited, constituting about 1/4th of its geographic mix.
  • Management is confident in its guidance of Rs. 25.50 EPS for FY13. This translates in PE multiple of 4.43 times, based on yesterday’s closing price of Rs. 113 and current year profitability. PE multiple, adjusting for cash per share of Rs. 33, translates into barely 3.13 times. On PBV basis, share is quoting at a multiple of 0.86 times.
  • Thus, this mid-cap IT company is available at attractive valuations with current market cap of Rs. 1,137 crore and trading in mid-single digit PE multiple, and below book value.

 

SELAN EXPLORATIONS TECHNOLOGY LTD

BUY:  CMP @ 265

TARGET:  445

TIME FRAME: 9-12 MONTHS

TRADE: NSE/BSE

 

  • Selan Exploration is into exploration & production of oil & gas. It currently operates 5 small fields in Cambay onshore-Lohar, Bakrol, Indrora, Ognaj and Karjisan. These oil fields were awarded to the company in 1995 under a Production Sharing Contract (PSC) with 100% participating interest by the Government of India. Selan was subsequently awarded two more fields in Gujarat namely Ognaj Oilfield and Karjisan Gas field. In-place resource stands at 73 mmbbl (million barrels)& 7 mmbbl in Bakrol & Lohar respectively. Production level is currently at ~660 bpd (barrels per day). The company sells its Crude output Brent to Indian oil at a discount of 5% to Brent. Five points to qualify Selan exploration as a great medium to long term buy.1) As of now, the company is producing oil from only 2 fields, Bakrol & Lohar. Management has also indicated that Indrora Oilfield contain far larger quantities of recoverable oil than Bakrol. Let us conservatively assume 100 Million Barrels of Oil Reserves under Selan.  At $ 70 per barrel, Selan’s reserve could be valued at Rs. 33,000 Cr.2) Previously, the technology recovery rate of exploration activities was ranging from 10-20% from the total potential reserves in Gujarat. But with the latest technology implementation of 3D contour mapping this recovery rate has gone up to as high as 50-60% for the similar fields. Contour mapping is just like a magnetic resonance imaging (MRI) scan of a human body. Stunning management quality and they are committed to make huge amount of shareholders wealth in the coming years. It buybacks, it allots warrants, it generates huge amount of cash, it has got a wonderful under leveraged balance sheet. Selan is one sure shot winner for the longer run.3) Selan started conducting exploratory activities in its fields during FY10 to establish additional reserves, and to maximize production. These activities are expected to be completed any day now (or may have recently completed).The company had completed data acquisition in these fields earlier. Numbers has been flattish so far over the last couple of years as it was consolidating its resources and investing a lot in its proven fields. Over the next few quarters the company would actually be in a position to ramp up production massively and deliver an EPS of 65-70(2013-13).Value it as per the sector and the valuation would be in 4 digits. Even if at the present juncture we see the valuation of selan; EV/reserves of 1.1, marketcap to sales of around 7 with a row of over 35%,its the cheapest oil exploration company in the bourses.4) Selan’s production cost is $11 per barrel, which is reasonably low. Company pays $5 per barrel as Royalty to the government. The stock has delivered an annualized return of over 30% from 2000 to till date, much superior to the broader market. Hell, it’s even higher than what “Warren Buffet Sahab”s berkshire Hathaway delivered in the same period .In my view creating and delivering shareholder value has been well handled by Selan. Selan is now all set to start the process of returning value to shareholders while they continue the value creation process. An EV of 5% of 2P Reserves could lead to market capitalization of Rs.1650 Cr which results in a value of over 1000 bucks.5) Crude oil demand is projected to increase to about 1700 mn barrels per year by 2014. Rising global crude oil prices have triggered increased domestic exploration and production activity. Gas demand is expected to reach 400 mscmd by 2012-13.All this factors makes selan a big beneficiary and helps one to have a lot of conviction on the stock. Selan posses robust fundamentals, amazing pedigree quality, mind boggling prospects, low business risk and which is poised to benefit from a strong macro-economic environment. Selan also has fat cash on books worth rs 70 per share. Selan is a stock which can be kept for lifetime.